Fake deposits faking microfinance outreach

e-MFP, 20 September 2016

Last week saw two nearly identical financial scandals hit two very different parts of the world. One was the revelation that Wells Fargo, one of the leading US banks, had falsely created some 2 million accounts for customers who never asked for them and were largely unaware of their existence. The other was about banks in India secretly depositing 1 rupee (0.015 euro) into their customer’s accounts.

What’s remarkable is the sheer silliness of the scandals – for the most part, this was not a case of money being stolen or fraudulently taken from customers. Instead, the scandals were being driven by the need to meet targets. In the case of Wells Fargo, staff were under pressure to meet sales goals. In the case of India, the banks needed to comply with government targets aimed at expanding savings accounts to financially excluded populations. In both cases staff managed to meet the targets, while completely missing the objectives the targets were meant to achieve. The financial writer Matt Levine put this brilliantly: “Measurement is sort of an evil genie: It grants your wishes, but it takes them just a bit too literally.”

Naturally, in our line of work, it’s the India scandal that’s most relevant. And frankly, we at e-MFP are not one bit surprised. more →

Microfinance self-regulation in India becomes official

e-MFP, 24 Jun 2014

Last week, MFIN, received official recognition from the Reserve Bank of India as a Self-Regulatory Organization in charge of regulating the activities of its members. This is the first time a financial organization received such official recognition in the country. Indeed, I’m not aware of any other countries that have a similar arrangement, so this may well be a global milestone as well.

This is a big deal that bodes well for the future development of the Indian microfinance sector. It also reminded me of an article co-authored by M-CRIL‘s Sanjay Sinha and myself back in January 2010, nearly a year before the onslought of the Andhra Pradesh crisis.  MFIN had been formed just months before, and had developed a Code of Conduct that included many important features, including strong limits to multiple lending – a maximum of 3 concurrent loans or combined amount of 50,000 rupees (~€750 at the time). However, we felt that as a purely self-regulatory institution, MFIN lacked the teeth to effectively monitor its members, and we made the case for a system quite similar to the one that’s just been implemented in India.   more →

A journey through India’s affordable housing Part 2: to the outskirts of Mumbai

Microfinance Focus, 25 November 2012, Co-authored with Vikash Kumar
This article is part of a series aimed at understanding what’s happening in India’s affordable housing sector.  It is based on interviews with residents of three low-cost housing projects:  Vaishnavi Sai (outside Mumbai), Anandgram (outside Pune), and Janaadhar Shubha (outside Bangalore).   The interviews were conducted during May-June 2012.  Read Part 1 here.

After a long train ride – nearly two hours – the line ends.  Passengers disembark at a small, but bustling community, easily covered on foot.  The commerce around the station is busy, but within a few city blocks, one already spies farmland beyond the last rows of houses.  Residents of all stripes live here, but the feel is decidedly working-class.

This could easily be late 19th century streetcar suburb outside Chicago or New York.  Or a fin-de-siècle banlieue on the outskirts of Paris.  But no, it’s Virar, one of the terminal stops on the Western Railways line heading north out of Mumbai.  Read full article here.

Journey through India’s affordable housing Part I: Introduction

Microfinance Focus, 16 October 2012, Co-authored with Vikash Kumar

This article is part of a series aimed at understanding what’s happening in India’s affordable housing sector.  It is based on interviews with residents of three low-cost housing projects:  Vaishnavi Sai (outside Mumbai), Anandgram (outside Pune), and Janaadhar Shubha (outside Bangalore).   The interviews were conducted during May-June 2012. Read Part 2 here.

Something is afoot in the low cost housing market in India.  Over the last two years, dozens of commercially-built projects targeted at the lower middle class have been going up in cities across the country, with tens, if not hundreds, of thousands of units being built.  In the past six months, many of these projects have begun opening their doors to the new residents.  We decided to pay some of them a visit. more →

Repairing a Tarnished Image: a Plea for Transparency in Indian Microfinance

MicrofinanceFocus, 28 March 2012

Last month, the headlines of the world’s papers read déjà vu.  “Suicides in India linked to microfinance debt.”  “SKS Microfinance implicated in farmer suicides.”  The headlines may have differed, but the article was one and the same, penned by Erika Kinetz of the Associated Press.  SKS was appalled, calling the report “libelous” and “scurrilous.”

For what it’s worth, the damage has been minimal.  SKS stock slid 4.25% on the day of the article, but recovered within a few days of trading.  The slide shows little distinction from its already volatile trading pattern (Figure 1).  Of course bad news can also cause lenders and investors to take a second look, or simply slow things down.  One MFI manager told me of exactly this very reaction on the part of an Indian bank in the immediate days after the AP article.  But the story got relatively little press in India, and no follow-up of significance.  By now it’s reasonable to say that the microfinance sector in India can breathe a sigh of relief. Seeing bad news get swept back under the carpet can be quite satisfying, even if the stink remains. more →

Unstable Core: is the funding of the Indian microfinance sector structurally flawed?

MicrofinanceFocus, 27 December 2011

On October 14, 2010, the Andhra Pradesh government issued an Ordinance that effectively shut down the microfinance market in the state.  That shutdown continues to this day, with collections at negligible levels.  It’s clear that the AP microfinance market is dead and will not recover for years.

Important as AP has been to India microfinance, it is not everything.  Despite the year-long crisis, repayment rates in other states remain strong.  And though AP-oriented MFIs have been seriously or even terminally wounded, others have remained unscathed.

Despite this, in the intervening period funding for MFIs – largely dependent on a handful of Indian state and commercial banks – has persisted in a state of severe liquidity deficit.  more →

Bring Microfinance into Politics

MicrofinanceFocus, 7 July 2011

It seems wherever you turn these days, politics is getting into microfinance. In Andhra Pradesh, the state government exercised its prerogative to kill off an entire industry. Next door in Bangladesh, Prime Minister Hasina decided to hound Yunus out of Grameen Bank, no matter the cost. The No Pago (No Pay) movement in Nicaragua counted on the support of the country’s president. What’s the industry to do in the face of such onslaught?

Weathering the Storm identified state intervention as one of the core risks faced by MFIs. It drew its lessons from the case of PADME in Benin, which was effectively nationalized by the government in 2008. At the time, PADME was in the process of transforming from an NGO to a for-profit entity, and the Benin government had made clear from the start that it was not in favor of such a plan. Despite this, PADME’s management and prospective investors had decided to push ahead, thinking that they would be able to parry the government’s attempts to block the process.

They were wrong. more →

Microfinance in Crisis: the Case of the Hidden City

Co-authored with Karuna Krishnaswamy; MicrofinanceFocus, 25 January 2011

Hyderabad has gone missing.  And it seems nobody has noticed the absence.  While academics and the press were scouring the villages of Andhra Pradesh in search of over-indebted borrowers and debt-induced suicides, and while politicians in the villages and government halls were busy protecting their beloved SHGs (and the vote banks they provide), Hyderabad up and vanished, leaving apparently no trace of its prior existence.

Naturally, we are referring not to the physical city, but to its microfinance market, as well as those of other cities in Andhra Pradesh.  Make no mistake – microfinance lending in urban AP has been widespread, outpacing even that of the countryside.  And yet, there seems to be little recognition of its existence and how it has been affected by the current crisis.  more →

Preparing for Failure: Strategies for Challenging Times

MicrofinanceFocus, 8 November 2010

The crisis in Andhra Pradesh has highlighted how exposed MFIs are to mass non-payments.  Industry insiders have suggested that even some of the largest MFIs simply might not survive if the crisis is not resolved soon.  And if that were to happen, is the industry prepared to deal with the process of unwinding one of these giants?

The top MFIs in India are large by any standard, with assets in the multiple $100s of millions, most of which are held in the form of outstanding microcredits.  Once an MFI is hobbled to the point that it cannot survive as a going concern, what happens to these assets?  Experience from other MFIs suggests that prospects for recouping them are not good. more →

Hidden Risks of Securitization, Part II: Establishing a Sounder Basis for Microfinance

Co-authored with Vinod Kothari; MicrofinanceFocus, 19 August 2010

Our earlier article on the Hidden Risks behind Microfinance Securitization raised serious concerns about the inherent and largely unrecognized risks embedded in securitizations of microcredit assets.  While we believe that this article provided a useful contribution to microfinance sector, we recognize that it is sometimes easier to be a critic than an actor.  As the issues we raised were serious enough to inspire action, in this follow-up we explore in greater detail some of the potential solutions that we believe could mitigate these risks. more →